I got my degree, I got a job…now what?

I’m okay with being wrong sometimes March 21, 2010

This post was inspired by one of Debt Ninja‘s recent posts (on his awesomely named blog, Punch Debt in the Face). He wrote about how he’d rather have some debt and more in savings than no debt and less savings. Basically, he wasn’t comfortable using his savings to pay off his debts and join the magical realm of the debt-free. Later, when Consumerist ran his post, there was quite a few nasty remarks about what he SHOULD be doing.

I’ve been struggling with this situation for a while: accelerate my debt payments, using money in savings, thereby increasing my overall net worth (because my debts are at higher interest rates than what I am getting from savings accounts), or just keep building up savings while slowly paying off debts. Mathematically speaking, I should be paying off my debts. But in this economy, I’d rather have more savings, with manageable debt payments, than less savings and hoping nothing bad happens. I’m a worrier. That’s the problem.

Also, my debt interest rates are pretty darn low. My student loans are at 3.25-3.5% APR, and my car loan is at 4.49%. If I ended up paying all that off, but then fell on hard times, I really doubt I could get a personal loan or credit card with rates that low. I also hate the idea of carrying a balance, or adding new loans (with the exception of a mortgage). Paying off everything (or most of my debt, since my debt load is more than my liquid assets) would mean that I’d probably pay more in the long run. It’s that “penny wise, pound foolish” idea. Yes, I’d be cutting expenses even more (though as it is, I’m NOT a spender), but I’d rather have money in the bank than be completely debt free.

Don’t worry, as of now, I’m working towards eliminating my debt. It’s a long and painful process. But I also worry that I may be doing other things wrong. Balancing all these financial priorities can get me a bit stressed. Besides looking at the short-term (the savings vs. student/car loans), I know that I’ve got to save for retirement. I max out my Roth IRA each year, and I contribute to my company’s 401(k) up to the 4% match, but I know I could be diverting more money to my retirement funds. I could be contributing up to the max, $16,500. But that’s a lot. I wouldn’t have to max it out, but just start contributing more. I checked this 401(k) Savings Calculator, and, even assuming no increase in salary, my retirement account total (at retirement age of 65) increases by more than $100k for every additional percentage point. I’m still early in the game, so compounding is really in my favor on this one.

So am I changing my 401(k) elections? Not yet. Why? I’m going to wait until my emergency fund hits its magical 2-years of expenses point. Yes, that’s excessive. But once it’s there, I promise to up my 401(k) contribution to 5%. I’ve decided that. You can hold me to it. And perhaps we can set another milestone for when I increase my 401(k) contributions to 6, 7, 8% etc. (I welcome your ideas!) And in the meantime, I’ll be paying off my debts. And saving towards other goals. And you can tell me that I should be paying off debts instead of having a 2-year emergency fund. If you can provide a valid enough argument, you may convince me to change my ways. But until then, I’m going to continue doing the “wrong” thing.

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11 Responses to “I’m okay with being wrong sometimes”

You are stupid! Just kidding. I think you gotta do what works best for your situation and your personality. Sounds like you got a solid game plan and I’m excited to watch you accomplish your goals. Being debt free would be awesome, but just knowing I COULD be debt free is also a great feeling. Keep plugging and chugging away girl!

Let me tell you, I could’ve paid off my student loans long ago with my savings, and I didn’t for one reason….I was scared of losing my job. Well, that one reason came into play a couple months ago and I’m SO glad I have my savings. Otherwise I’d be pretty desperate/depressed right now. (And hooray for super low student loans! I’m always horrified when I hear of people with super high rates….I guess we just lucked out by graduating in the right time frame.)

In the end, the only thing you “should” be doing is what you feel comfortable with…..you don’t want to lose any sleep over your decisions. Besides, if once you get to your EF goal, you could always pay off your debt in one shot if you change your mind….it doesn’t exactly work the other way around though.

Is this savings on top of your emergency fund? The way I understand it, you should get an emergency fund saved up before you worry about the debt too much, right? It is hard to get rid of that money you actually have to pay something off that is not actually hurting you at this very moment, but you logically understand will hurt you in the long run. It’s mostly a psychology thing, I would say. Or maybe an instant gratification problem. But if your job is on rocky ground (doesn’t sound like yours is, Steph 😉 ), I could see how you would be nervous to spend your savings, but it would also be nice to be debt free if you end up jobless.

I say you should make a debt paying-off schedule some day when you’re feeling particularly rational, and then just stick to it when the time comes around.

Ha. I think it’s so funny (not really) how people get so self-righteous on other people’s personal finance blogs. Helllloooo. Personal finance is “personal”. I agree with Debt Ninja who says you should do what fits your situation and personality. As my very smartypants friend once said, as long as you pay down debt (without incurring new debts) and/or save, it really doesn’t make much difference what the ratio is. You have a solid plan so I’ll be rooting you on. (BTW, thanks for your kind words on my blog.)

I have to say, it’s so funny how many people CLEARLY don’t read PDITF’s blog!! His fiancee has NO debt, the student loans are his only debt (aside from the CC he pays off monthly), he just got a $12k raise, and on and on. People are so freakin presumptuous!

Hey, it’s great that you now have goals and a set point in time in which you’re going to act. Personally, I’d always rather err on the side of caution and liquidity. I know you could never get interest rates that low in NZ!

Hah! guess what just happened to me? I am moving credit card payment dates around to fit with my expense payments and this month it comes a little early, which is OK, because I can handle that. So I calculate everything out and set up the automatic payment and make sure there’s enough in there to pay for the credit card bill and also enough for me to live on until I get my 1800$ expense check (wow)–the rest goes to savings.

At the same time I see I have enough for this, so I decided it’s time to pay my car down a bit. just paid $2000 to the principle of the car loan (yay!).

I check the account today (because this is the day the bill is due) and I see that I accidentally paid my rent twice this month … and of course they cashed both of them. arrrrrrrrrgh. So I just scrambled to move money around and I’ll be OK, but I won’t be paying my parents for my share of our cell phone bill until a couple of weeks from now.

Sounds like I need my emergency fund in an account that won’t take 4 days to transfer from …

[…] also decided that I might as well contribute more to my 401(k). I had said that I was going to hold off increasing my contribution amount until I reached a goal amount in my saving…. But then I realized that was kind of a silly plan. I have enough extra cash in my checking […]

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